SEC v. Gulf & Western Industries, Inc.

Decision Date24 November 1980
Docket NumberCiv. A. No. 79-3201.
Citation502 F. Supp. 343
CourtU.S. District Court — District of Columbia
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. GULF & WESTERN INDUSTRIES, INC., Charles G. Bluhdorn, Don F. Gaston, Defendants.

A. Fred Freedman, Steven Rosenberg, Washington, D.C., for plaintiff.

Arthur L. Liman, New York City, for defendant Gulf & Western.

Edward Bennett Williams, Washington, D.C., for defendant Bluhdorn.

Peter E. Fleming, Jr., New York City, for defendant Gaston.



In this proceeding, the Securities and Exchange Commission (SEC or Commission) seeks permanent injunctive relief enjoining Gulf & Western, Inc. (Gulf & Western), its chief executive officer, Charles Bluhdorn, and Don F. Gaston, an executive vice-president from engaging in allegedly fraudulent practices in violation of the federal securities laws. The Commission charges the defendants with violations of the anti-fraud, anti-manipulation and reporting requirements of the securities laws.1 The Commission's 60-page complaint alleges a wide range of violations and charges the defendants with improper financial reporting, false and misleading disclosures and failure to disclose material information concerning the corporation's business operations, financial condition and management activities in filings with the Commission and in documents disseminated to shareholders.

In response to the complaint, the defendants assert six affirmative defenses which in summary charge the Commission with certain improprieties during the Gulf & Western investigation, a number of equitable defenses and prior acquiescence in the company's accounting methods which are challenged in the complaint. In the first defense, the defendants assert the complaint should be dismissed because of the Commission's alleged improprieties which include: (1) violation of the attorney-client privilege; (2) leaks by the SEC staff to the press during the investigation; (3) misuse of market regulation powers; and (4) interference with defendants' access to witnesses. In three of the defenses, the defendants reallege the facts underlying these claimed abuses and apply various legal principles including: balance of equities, deterrence of future abuses by the SEC, and unclean hands. The fifth defense asserts that the Commission is estopped from challenging accounting principles it previously had approved and the sixth defense charges the Commission with laches and equitable estoppel. The Commission responds that these various defenses are insufficient as a matter of law and have filed a motion to strike. Fed.R.Civ.P. 12(f). Oral arguments on the defendants' motion were considered by the Court on November 10, 1980.

Motions to strike are not generally favored. 2A Moore Federal Practice ¶ 12.221 (2d ed. 1979). If an affirmative defense is sufficient as a matter of law or if it presents substantial questions of fact or law, the motion should be denied. United States v. 416.81 Acres of Land, 514 F.2d 627, 630 (7th Cir. 1975). The prevailing rule was noted in Systems Corp. v. American Telephone & Telegraph Co., 60 F.R.D. 692, 694 (S.D.N.Y.1973):

Motions to strike defenses are not favored and will be denied "if the defense is sufficient as a matter of law or if it fairly presents a question of law or fact which the court ought to hear." Before this type of motion can be granted "the Court must be convinced that there are no questions of fact, that any questions of law are clear and not in dispute, and that under no set of circumstances could the defenses succeed." (citations omitted).

However, in Augustus v. Board of Public Instruction, 306 F.2d 862, 868 (5th Cir. 1962), the court refused to strike a portion of the pleading and made the following analysis:

A disputed question of fact cannot be decided on motion to strike. It is true, also, that when there is no showing of prejudicial harm to the moving party, the courts generally are not willing to determine disputed and substantial questions of law upon a motion to strike. Under such circumstances, the court may properly, and we think should, defer action on the motion and leave the sufficiency of the allegations for determination on the merits. (citations omitted)

The motion should be granted where it is clear that the affirmative defense is irrelevant and frivolous and its removal from the case would avoid wasting unnecessary time and money litigating the invalid defense. SEC v. Weil, Current Fed.Sec.L.Rep. (CCH) ¶ 97,541 (M.D.Fla. Feb. 7, 1980); Narragansett Tribe of Indians v. Southern Rhode Island Land Development Corp., 418 F.Supp. 798, 801 (D.R.I. 1976). Additionally, defenses which would tend to significantly complicate the litigation are particularly vulnerable to a motion to strike. Louisiana Sulphur Carriers Inc. v. Gulf Resources & Chemical Corp., 53 F.R.D. 458, 460 (D.Del.1971).

With these standards in mind, the Court has considered the legal memoranda of counsel and their oral argument and concludes that the Commission's motion should be denied as to the allegations of the first defense based on the breach of the attorney-client privilege and matters which defendants claim are directly related thereto. Pending further discovery, that defense may be asserted. The Commission's motion to strike the remaining defenses is granted.

A. First Affirmative Defense

As noted, the defendants' first affirmative defense is a four prong reference to certain alleged improprieties committed by the Commission during its investigation of the possible securities law infractions by Gulf & Western. Because the investigation was based on the fruits of these alleged violations, the defendants assert that the Commission's complaint should be dismissed. The defendants' oral argument focused on the claimed breach of the attorney-client privilege and the Court is primarily concerned with that claim.

Joel Dolkart, the former general counsel to Gulf & Western was indicted for grand larceny and other criminal law violations in 1974. Later he assisted the Commission during its investigation into the company's alleged securities law violations. The defendants claim the information was obtained from Dolkart in violation of the attorney-client privilege since he had counseled and advised Gulf & Western on many of the matters being investigated. Additionally, during the investigation the New York Times ran a series of articles on the charges against the defendants. The defendants claim the SEC staff leaked the information obtained from Dolkart to the press and that this caused injury to the reputation and credit of defendants and violated the Commission's own rules regarding private investigations. Furthermore, defendants claim these two abuses are of constitutional dimensions because the breach of the attorney-client privilege violated their legitimate expectation of privacy and the leaks to the press constituted a summary punishment without the due process guarantees of the Fifth Amendment.2

In Wellman v. Dickinson, 79 F.R.D. 341 (S.D.N.Y.1978), the trial court was faced with a similar situation when the defendants alleged the Commission had committed abuses of a general nature during the investigation. Judge Carter summarized his concerns at page 351 in the following language:3

Defendants are in effect, asking this court to weigh the societal interest in curbing governmental abuses in the conduct of agency investigations against the societal interest in protecting the investing public, and conclude that the latter must yield to the former. I have serious, perhaps immutable, doubts as to Defendants' contentions with respect to which of these two competing concerns must triumph. ... However, it is wiser to render a decision on this question in the context of a specific factual setting, rather than in the abstract and after the arguments for and against the competing rulings have been fully explored, rather than summarily addressed, by the parties. (citation omitted)

Defendants ask this Court to apply the same balancing test and dismiss the complaint because of the alleged violations by the SEC.

The two alleged improprieties claimed by the Gulf & Western defendants involve substantial questions of law and fact. Three issues underly the alleged breach of the privilege: (1) was the privilege actually breached by Dolkart,4 (2) is the exclusionary rule applicable to information derived from breaches of this privilege,5 and (3) is the remedy for the alleged violation suppression of the evidence or dismissal of the action. The Court may find, as the Commission urges, that any information obtained from Dolkart in violation of the attorney-client privilege may be isolated and suppressed at trial. On the other hand, defendants may be correct in their view that all of the information obtained by the Commission relates in some fashion to the breach by Dolkart.6 It is also not clear that the alleged leaks to the press are abuses which would offend the due process rights of the defendants. The Court must be able to ascertain whether the information was leaked by members of the Commission's staff, whether the leaks caused Gulf & Western "substantial and irreparable harm," and whether the leaks were a form of summary punishment which denied defendants due process of the laws.7 Limited discovery should shed light on these matters.

As the Commission urges, affirmative defenses in SEC enforcement actions have not been well received in this District Court and motions to strike have been granted with little discussion of the underlying facts. SEC v. Canadian Javelin Limited, 451 F.Supp. 594 (D.D.C., 1978) (order striking affirmative defenses based on claims of failure to join indispensable parties, laches, statute of limitations, inequitable circumstances and unclean hands); SEC v. Continental Advisers 1978-79 Fed.Sec. L.Rep. (CCH) ¶ 96,489 (D.D.C. June 29, 1978) (court refused to ...

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